If 70% to 90% of mergers and acquisitions fail, can procurement make a difference in getting things right?
“Everyone and their grandma gets to go to M&A meetings. But often not procurement – and that’s not right.” So says a CPO who has been involved as a procurement leader in a number of high profile deals during his career.
“Even if the story is not about procurement, you need to be involved,” he says. “If 30-50% of your [organisation’s] revenue is in third party spend, procurement is clearly part of the deal. Doing [a deal] and then coming to the CPO two years later is not the right way to do it.”
Global merger and acquisition activity is on the rise. It set a record in the first nine months of 2018, beating a previous pre-financial crisis high of more than a decade ago. As of September this year, a staggering $3.33tn of deals had been agreed, a rise of 39% on 2017. The Financial Times reports that if deal making continues at this rate for the rest of 2018, M&A activity could hit $4.3tn for the year. It has only exceeded $4tn twice in history.
It’s not hard to see why activity is so frenetic. As companies face down increasing technological disruption, transformation is high on the agenda, and buying up or merging with other companies – whether competitors or cutting-edge start-ups with valuable IP – is one protection strategy. But with research cited in Harvard Business Review suggesting that between 70% and 90% fail, a deal is by no means a foregone success.
So, how can procurement help? Once a deal is closed, the value of procurement is clear, given the importance of synergy targets. Karen Mansell, SVP procurement at Bayer CropScience (which acquired agri-business Monsanto in June 2018), points out: “M&A deals generally have commitments to the shareholders for increased value revenue and savings. For savings, there are only – crudely speaking – two ways to do this: spend less money on people, or spend less on third party spend.”
But involving procurement only at the point where synergies – already committed to – need to be delivered is at best missing a trick, at worse potentially damaging. Procurement should be involved much earlier, “as early as possible”, believes Mansell.
Until recently, Izzy Khan led mergers, acquisitions and divestments from a procurement perspective at GSK, working on deals including GSK’s joint venture with Novartis. She agrees with Mansell and Spalcke that procurement needs to be involved early, rather than getting involved “when the deal is already happening”. While the role she held used to be a more tactical one, supporting post deal, Khan soon realised procurement was adding limited value, and “fought [her] way upstream”.
For Phil Singleton, head of corporate real estate sourcing at Swiss Re, where he also provides sourcing M&A support, getting more involved with deals is a real area of opportunity for procurement. “It’s all standard stuff, just applied in a different environment,” he says. “It’s not completely out of procurement’s comfort zone, and helps procurement get closer to the business. But the stakes are high. If you fail, you probably won’t be asked again.”
If that doesn’t put you off, Mansell encourages any ambitious procurement professional to try and work on M&A activity. “It’s exciting,” she says. “You have a license to create something new and challenge those sacred cows of process and suppliers. It’s one of the best learning opportunities you can get; you deal with all parts of the business and learn lots about human behaviour.”
With all that in mind, SM has compiled this guide to the areas where procurement can add value not only limited to delivering synergies, pre-deal and post-deal. Think of it as your very own M&A playbook…
Pre deal: M&A strategy and target selection
Tell the procurement story
According to Alessandro Caviggia, managing director at Accenture Strategy: “The sooner you are involved, the better. You can frame the procurement contribution in terms of how well procurement can help the company to be competitive – and not just from a pure cost cutting point of view.”
He adds that attention is increasingly being paid to sustainability and trust. “How will the new entity be perceived? How will procurement help it be seen positively by key suppliers?” These are questions procurement can answer to create a compelling narrative of where it adds value.
Think about what you can bring to the table and spell this out to leaders reluctant to involve the function. A deal could be cheaper or more expensive based on the synergies you could get.
Align to the investment thesis
Being clear on your value means really understanding why the transaction is being considered. “The deal team has a very clear investment thesis – the reason why they are buying the business,” explains Will Harman, VP global supply chain at private equity firm Apax Partners. “Sometimes procurement forms part of that, but often it does not. Aligning with the thesis is critical.”
He adds that while cost might be a priority, often it isn’t, if the target company is part of a buy and build strategy, for example. “You might have bought a business that is growing 50% a year,” he says. “In these cases, procurement is not in the top five [priorities]. If you go in with a high cost push in a business that is growing explosively, you will find you have less influence than you like. You need to find angles to add value, such as risk management, building flexibility into contracts or helping to create more management bandwidth.”
Klaus Hofmann, CPO of KraftHeinz, who led on the 2016 integration from a procurement perspective, says procurement in his business often does “a quick assessment” of the target company’s organisational structure. “In rare cases, we quietly investigate via our network how we are seen in the market,” he adds. “We are much more interested in their overall approach – for example centralised or decentralised, maturity of procurement, use of technology – than what they achieve in pricing.”
You will almost certainly need to engage the help of a ‘clean team’, an impartial third party – typically a consultancy– who operate a virtual data room, or the ‘clean room’ to pass information back and forth between companies without breaching confidentiality rules.
Khan found a key way for procurement to add value was putting these kinds of services out to tender, rather than just going for the Big Four or names like McKinsey or Boston Consulting Group. “Now we always put it out for tender, and we don’t just go to the same guys we went to last time,” she says. “In the past, we had strategy firms doing [project management work] for thousands of pounds a day. That’s not their core skillset, so why do it? Why not go for tier two consultancies? I spent time identifying niche firms less than half the price of a Big Four company. They are desperate for this kind of work from a big company, and will go above and beyond. You will get better levels of service. Mixing up the supply base is a huge aspect procurement can bring.”
To get buy-in from her stakeholders, Khan compromised, splitting the work into parts and using smaller firms for certain bits. It took perseverance – about six months before she was able to bring in different firms – but paid off in terms of savings. While using consultants is often a necessity, Singleton cautions against taking all the juicy work away from the in-house team. “Look at the expertise you have,” he says, adding that these projects are great for developing people: “It’s motivating for the internal function and develops capability.”
Pre Deal: Due diligence and planning
Design your own milestones
“Get involved in strategy planning and budgeting,” advises Khan. “Make sure you have the resource you need and get involved in setting the timeline. Otherwise, you might get told ‘we need it in two weeks’, leading to panic and chaos. Set your own milestones. That means the process will be smoother, which in turns helps with improving procurement’s credibility.”
In Bayer’s recent $66bn acquisition of Monsanto, procurement was involved in the early due diligence and contributed to setting the offer price. “We indicated procurement synergy ideas before we made the price offer, and it was built into that,” says Mansell.
Equally important was contributing to savings targets. “We don’t want to over-commit to procurement savings that we can’t hit,” she adds. According to research by McKinsey, about a quarter of managers overestimate savings by at least 25% in deals. Procurement needs to be at the table to ensure estimates are realistic, or risk being on the back foot from the start.
“When you talk big numbers, a couple of weeks delay could be millions – missed synergies that you will never get back,” warns Caviggia. In Bayer and Monsanto’s case, for example, the firm has committed to $1.2bn annual synergies by 2022, certainly a big number. “That’s the benefit of involving procurement in the pre-merger phase as soon as possible, to quantify the value,” he adds.
Plan, plan, plan…
Mansell points out that the regulatory pressure and scrutiny around major M&A deals means the process is taking longer. “Use that time to be the best prepared you can be with documentation,” she advises.
“There’s an opportunity in that window to work in a clean room environment, ensure category strategy and documentation, to be able to share it as soon as possible,” she adds. In Bayer’s ‘clean room’, the team pulled together contract lists, spend taxonomy, spend cubes, supplier lists and “about 400 synergy ideas”, producing category playbooks for both sides.
While you will not be able to get all the information you would ideally want, Singleton advocates being tenacious and pushing where you can to help in the planning stages. “There will be more information available,” he says. “You have to be demanding. They might not volunteer it. Get whatever you can to build a picture and cross reference the info you can get.”
Having a clear plan helps with stealing a march on suppliers, something many companies fail to do, says Caviggia. “As soon as the possible merger is in the news suppliers get ready to deal with a combined entity,” he adds. “The more time you let them run with that preparation, the less surprise advantage you will have.”
Make sure you are appropriately resourced for integration activity. “You need to resource up for it,” advises Harman. “There’s a huge amount of activity that will need to be done around a short and immediate deadline, activity that would normally take around one to four months. Think carefully about your bench.”
Look for red flags
Sourcing and contracts are one area of a deal, and while it probably won’t make the difference, it can help inform the strategy. Singleton says he is looking for “showstoppers”, such as a long-term contract that might inhibit Swiss Re’s ability to bring the company on board.
Other red flags could be a mismatch in areas like CSR. And remember the devil is in the detail when it comes to contracts.
“A common deal problem is people trying to fix their problems quietly,” says Khan. “They see it as a failure to admit when things go wrong.” Her senior manager refers to a green box on a project score sheet for a deal as a watermelon. “Because it’s red on the inside. There’s no such thing as a green in a deal, because you move so fast and things are always changing. If you mitigate your risks and understand them, in a deal that’s a strength, not a weakness.”
Post deal: Integration
The people stuff: move fast; be honest
Mansell has been involved in a number of M&A deals during her procurement career and not all of them could be classed as successful. What she feels will make the difference in the Bayer/Monsanto integration is the focus on people, communications and change management. “That is what is going to make this one more successful: organisations aren’t boxes and wires: they’re people,” she points out.
From day one, communication has been prioritised, with regular town halls and employee Q&A sessions. A website was even created to enable employees to submit questions, and cultural training to be rolled out, given there was some nervousness about how the German (Bayer) and US (Monsanto) cultures would work together. “Some people were worried about having a line manager from a different culture,” says Mansell. “We kept that stuff out in the open, having discussions about it.”
In any M&A activity, the likelihood is not everyone will keep their role, so this needs to be handled sensitively. Making decisions early on is critical, advises Hofmann.
“We take decisions on people very fast so that the organisation stabilises quickly and people get on with new roles,” he explains. “Be brutally honest and communicate quickly. People might not like the message, but they will know what the future is, and be grateful for clarity. [Delaying] decisions on people will hurt you.”
He adds that it is arrogant to assume the people in the acquiring or dominant company will automatically be better and should be given the best roles. “There are usually very good people in the target organisation who will contribute enormously. On this basis, there will always be people on our side who will have to leave.”
Create the best of the best
Building a post-deal team as the opportunity to create the best of the best, a philosophy that extends into other areas once you have full spend transparency, says one CPO. “If we use the same supplier, we will never have the same total cost of ownership, so one of us is buying better. That means there is a treasure trove of things that two procurement organisations can share. Break it down, go into the value creation process. Look at things like who has the better relationships with suppliers, and is getting the best of the best in terms of collaboration and supplier-enabled innovation.”
Creating the best of the best – or something completely new – can also help smooth over tricky cultural issues. “We didn’t want it to be one company ‘eating’ the other,” says Mansell of the Bayer/Monsanto deal. “We wanted it to be two companies coming together to build something new. Therefore we needed the best people from both sides and to make sure it is not biased on one side or the other from a cultural perspective. Procurement is really well placed to help connect those dots and build bridges between the two organisations’ networks as a cultural ambassador.”
Don’t lose sight of the day-to-day
The integration phase is often “not the perfect environment for operational efficiency”, says Singleton. There may be uncertainty over roles and morale may be shaky in some areas.
“You can’t expect to motivate people all the time,” says Khan. “There will be people openly updating their CV in the middle of the office. If I know someone has mentally checked out, it’s my responsibility to mitigate that risk and ask for budget for another pair of hands. Be realistic about how motivated people are.”
“It’s really hard to get people to focus on the job in hand and not be distracted,” Mansell acknowledges. “But you still have customers and a business to run – it can’t all be about integration.”